FTX Bankruptcy Hearing to Start in US Court as Creditors Wait for Answers

It has not been a pleasant month for troubled crypto trading platform FTX, which until recently was one of the largest industry players.

Things have certainly not been any easier for the company’s one-time whiz-kid CEO, Sam Bankman-Fried (SBF). Still, the biggest fallout from the far-reaching collapse of the crypto exchange and its affiliates is likely that suffered by their customers, which, as PYMNTS reported last week, could number up to one million.

FTX is far from the first cryptocurrency exchange to collapse, and the Web3 industry is known primarily for its volatility, but FTX’s demise has been especially jarring given the reputation it enjoyed for being a supposedly reliable actor in a still-nascent marketplace.

The downfall has triggered a worldwide regulatory investigation, and the U.S. House Financial Services Committee has planned a bipartisan hearing for December.

This Tuesday (Nov. 22), a first-day motions hearing on FTX is set before a U.S. bankruptcy judge.

In advance of tomorrow’s hearing, below is a summary of what we know so far about the situation:

On Nov. 2, CoinDesk published a report revealing that FTX’s sister trading fund, Alameda Research, was significantly exposed to FTX’s FTT token, which underpinned its supposed solvency, and not an independent asset like a fiat currency or a third-party cryptocurrency.

In response to the revelation, rival crypto platform Binance on Nov. 6 began to unload a nearly $2 billion equity stake in FTX held primarily via FTX’s FTT token. This triggered fears that FTX could not pay its debts and that Changpeng Zhao (C.Z.), the founder and CEO of Binance, knew something other investors didn’t.

C.Z.’s actions caused a “run” on FTX, as the exchange’s customers started to withdraw $6 billion, crashing the price of FTT tokens by 72%.

Binance offered to acquire FTX, which at its peak was valued at $32 billion, as part of a rescue deal. The merger would solidify Binance’s position as the top cryptocurrency exchange and market-making platform. But as more information came to light, C.Z. pulled out of the deal, effectively leaving FTX and SBF dead in the water.

Practically overnight, FTX imploded. By Nov. 11, SBF had resigned as CEO, and the company paused all customer withdrawals and filed for bankruptcy protection alongside more than 130 other affiliated companies.

As part of the bankruptcy, FTX on Nov. 11 installed John J. Ray III as CEO. Ray is best known for recouping funds for stakeholders while overseeing Enron’s liquidation. However, Ray has characterized FTX’s situation as even worse than Enron’s, with even less money to recover.

The following week, repercussions of FTX’s demise started to hit the rest of the crypto industry as BlockFi, a digital asset lender that received a bailout from FTX indicated on Nov. 15 that it may file for bankruptcy.

Meanwhile, SBF continues to offer varnished insights into the implosion on Twitter. At the same time, a projected 1+ million FTX customers and creditors angrily look on as the reality that they may never be “made whole” from their losses starts to sink in.

On Nov. 16, the U.S. House Financial Services Committee announced a December hearing on the exchange’s collapse.

On Nov. 19, the exchange launched an asset review of itself and its global affiliates to prepare for the sale or strategic reorganization of certain businesses.

The Losses

FTX has said it owes its 50 biggest creditors more than $3 billion. While their names were not disclosed in court filings, it was revealed that the exchange’s top 10 creditors are owed about half of that amount, or $1.45 billion, with each claiming amounts liable of more than $100 million.

The top 50 claims by FTX creditors range from $21 million at the low end to over a quarter billion at the high end.

In the U.S., companies are required to disclose information about their debts as part of bankruptcy proceedings. The company’s creditors will get to weigh in on the best way for the exchange to allocate its repayment of the outstanding debts as the bankruptcy proceeds.

So, What Happens Next?

The case is still unfolding, and the convoluted situation will likely take months, if not years, to untangle.

It remains to be seen what the collapse of FTX means for the crypto industry at-large as regulators begin to craft legislation that reflects the increased pressure for scrutiny on cryptocurrency trading, investments, and the platforms that support this emergent ecosystem.

These comments are in keeping with a PYMNTS survey that found 52% of traditional financial firms which are considering blockchain and crypto adoptions say that unclear regulation was their main concern.

Will FTX’s customers get their money back? The exchange played fast and loose with its customer deposits. A large focus of the bankruptcy will be what remains, how the exchange’s hundreds of thousands of retail and institutional customers can recoup their savings, and what the timeline and realities for any distributions will be.

Meanwhile, a class-action lawsuit was filed last week against SBF and the celebrities who endorsed FTX, such as Tom Brady, Larry David and Steph Curry, accusing them of promoting “unregistered securities.”

Where will the money to pay back customers come from? And will FTX executives including SBF and the Alameda Research co-CEOs, Sam Trabucco and Caroline Ellison, be held accountable for their actions?

Elizabeth Holmes was just last week (Nov. 18) sentenced to more than 11 years in prison for defrauding investors, and FTX’s own investors may be hoping for a similar outcome for the exchange’s leadership.

This remains a developing story, and PYMNTS will continue to report on the repercussions and realities as more information comes to light during the legal proceedings this week.